Betsy DeVos Held in Civil Contempt for Collecting on Student Loans

Secretary of Education Betsy DeVos was held in civil contempt and sanctioned Thursday evening by a federal judge who ruled the Department of Education’s collections on student loan debts from thousands of borrowers who were defrauded by for-profit colleges were illegal.
The finding is part of a class action lawsuit filed by Harvard University’s Project on Predatory Student Lending. In the ruling, Magistrate Judge Sallie Kim of the U.S. District Court in San Francisco found that the Department of Education failed to show any reason that it should not be held in contempt. The judge fined the department $100,000 and ordered monthly reporting updates.
“There is no question that Defendants violated the preliminary injunction,” she wrote in the ruling , referring to “defendants” DeVos and the Education Department. “There is also no question that Defendants’ violations harmed individual borrowers who were forced to repay loans either through voluntary actions or involuntary methods (offset from tax refunds and wage garnishment) and who suffered from the adverse credit reporting.”
“Defendants have not provided evidence that they were unable to comply with the preliminary injunction, and the evidence shows only minimal efforts to comply with the preliminary injunction,” she continued. “The Court therefore finds Defendants in civil contempt.”
The ruling follows a case management conference held earlier this month at which the judge addressed a Sept. 18 filing by DeVos that showed the department had continued to collect on the debt of thousands of former Corinthian Colleges students in direct violation of the court’s previous injunction ordering it not to collect on those debts.
“Taking this rare and powerful action to hold the Secretary of Education in contempt of court shows the extreme harm Betsy DeVos’ actions have caused students defrauded by for-profit colleges,” Toby Merrill, director of the Project on Predatory Student Lending, said in a statement.
According to the filing, the department demanded incorrect loan payment from 16,034 students. Of those, 3,289 borrowers made one or more loan payments, which they were not actually supposed to pay, and 1,808 had their wages, tax refunds or other benefits garnished. The department has still not confirmed that 1,147 students’ loans are in the correct status.
“Thousands of students illegally had their tax refunds seized and wages garnished, and the Department still can’t identify all of the affected students nor refunded the money,” Merrill said. “The judge is sending a loud and clear message: students have rights under the law and DeVos’ illegal and reckless violation of their rights will not be tolerated.”
In the ruling, the judge noted that DeVos expressed regret about the situation through her counsel.
“We did not meet our own standard,” Mark Brown, chief operating officer at the Department of Education’s Federal Student Aid office, said in a message posted to Twitter on Thursday, adding that the loan servicers mistakenly billed the borrowers.
“Although these actions were not done with ill intent, students and parents were affected and we take full responsibility for that,” Brown said. He said department officials are taking steps internally to fix the situation and that 99% of borrowers who made payments when they didn’t need to have been refunded.
The ruling comes on the heels of the Project on Predatory Student Lending filing a lawsuit Tuesday against DeVos on behalf of approximately 7,200 former students enrolled in now-defunct for-profit schools in Massachusetts operated by Corinthian Colleges, demanding department officials cancel their student loans.
Another lawsuit also filed Tuesday, this one in U.S. District Court for the District of Columbia by National Student Legal Defense Network, alleges that the Education Department allowed a different operator of for-profit colleges to mislead students and “caused students at the schools to borrow money and waste months of their lives in pursuit of an education they did not know was unaccredited.”
The lawsuits were filed the same day House Democrats threatened to subpoena DeVos for obstructing their investigation into the department’s role into how it allowed that operator of for-profit schools, Dream Center Education Holdings, to continue enrolling students and bank tens of millions of dollars in federal student aid despite losing their accreditation.
A Democratic committee aide said DeVos and her department’s handling of for-profit operators is an ongoing issue for oversight for the House Education and Labor Committee and it plans to hold hearings on the issue in November.

What Is a Payroll Advance?

Unexpected expenses can leave you feeling stuck if you don’t have funds available to pay for them. Some companies offer payroll advance services to help employees bridge the financial gap between paychecks and avoid higher-cost options. But they’re not necessarily a good choice.
An employer-led payroll advance is when a company, either directly or through a third party, allows you to obtain part of your upcoming paycheck days or even a week or so ahead of time.
Traditionally, payroll advances have been rare requests by employees. But the digitization of the payroll process has made it easier for a company to make money available when employees need it.
Employees would most likely use this service if they had a bill they were scrambling to pay or last-minute expense, says Bill McCracken, president of Phoenix Synergistics, a marketing research company that serves the financial services industry.
“For an employer to make available part of a paycheck to pay that bill, I think that’s a positive,” McCracken says.
A common type of payroll advance not tied to your employer is a payday loan or cash advance, which is offered through a bank or credit union alternative, such as a check-cashing service. These types of short-term loans provide immediate cash, but can be very expensive for borrowers.
“The thing that really differentiates this product from a payday loan is the fact that it’s tied in with the employer,” says Glen Sarvady, managing principal of 154 Advisors and a payments expert working with credit unions, banks and financial technology companies.
With an employer-led payroll advance system, employers partner with a third party – often a fintech – to offer payroll advance as a benefit to employees, giving them a chance to borrow against the next paycheck.
In recent years, several businesses, including Walmart, signed partnerships with companies to provide payroll advance services to their workforce.
In the case of Walmart, employees who sign up for the program can get an estimate of hours worked and accrued earnings on a mobile app. Depending on the employer, employees could be charged a small, flat fee for each pay period in which they use the service and get the money sent to a bank account, a card or even to pay a bill directly.
Other services available through an employer-led payroll advance arrangement could include savings options, online bill paying and financial counseling. Often, there are limits on how much an employee can borrow, such as no more than 50% of an upcoming paycheck.
Payroll advance fees are usually lower than a payday loan because it’s a lower risk for the payroll advance partner company.
“They know the next paycheck is coming,” Sarvady says.
With many Americans living paycheck to paycheck – as much as 78% of U.S. workers, according to a 2017 CareerBuilder survey – a benefit like payroll advance could help cover emergency expenses. Also, according to the 2019 Charles Schwab Modern Wealth Survey , only 38% have built up an emergency fund .
The situation gets worse at lower income levels. It’s tougher for lower-wage workers to manage emergency expenses without taking out a payday loan or triggering an overdraft on a bank account .
An employer offering payroll advance can “address a little bit the cash flow crisis that is a very real part of the day-to-day lives” of low-income workers, McCracken says.
For someone who doesn’t have much money on hand, obtaining the money immediately is vital, because they might have bills that need to be paid by 5 p.m. that day, he adds.
A payroll advance system is also valuable for people with inconsistent pay and hours, such as restaurant workers or ride-share drivers.
“I think there’s a natural correlation with the gig economy,” Sarvady says.
Offering a service such as payroll advance also can help limit worker turnover and ease day-to-day financial-related stress for employees.
As with any service that allows you to borrow money, there are potential downsides, especially for employees who continually take paycheck advances.
“They can have a role in helping people with occasional expenses,” says Lauren Saunders, associate director of the National Consumer Law Center, which works on consumer-focused issues for low-income and other disadvantaged people. “My concern is that they can easily lead to chronic use that is similar to payday loans.”
For example, if someone continually gets payroll advances, it can be “kind of a sugar rush,” Sarvady says. “It’s only as good as people being fiscally disciplined.”
For employees, it’s important to make sure the payroll advance service is tied to your employer and its payroll system, McCracken says.
“The so-called early wage access apps that are offered directly to consumers are just a payday loan,” Saunders says. “They have no connection to actual wages.”
Before taking out a payroll advance, consider the long-term consequences. Ask yourself these questions to determine whether you can manage this fast money option.
Is there a limit on the amount of advances? “There should be a limit to the amount that you can advance because you don’t want a situation where you can advance 100% of your check” because you still have regular, ongoing bills to pay with each paycheck, McCracken says.
“If you couldn’t afford $300 out of this paycheck, why can you afford it out of the next paycheck?” Saunders says.
What are the fees? “The fees and interest rate should be reasonable for this type of product,” McCracken says. An employee can weigh those costs against payday loan rates – where the annual percentage rate can be as high as 400% – as well as the overdraft costs for banks, which average about $30.
Is there a limit on the number of times you can get an advance? If there are too many advances, it defeats the purpose and you’ll “get the employee into a cycle of borrowing where they have nothing in their paycheck,” McCracken says.
Some employers offer financial education through the third-party payroll advance company. But it’s better for employers to structure the product so it’s safe rather than offer a product that lets people get behind in a paycheck, Saunders says.
In the end, payroll advance is a loan, “but you’re borrowing from yourself,” McCracken says. “The company has a vested interest to make sure the employee doesn’t get in over his head.”
A employer-led payroll advance program is different from a payday loan primarily because it’s connected to the employee’s payroll, rather than being a transaction with a company that’s not connected to the employer.
There are also differences in the method of borrowing and cost.
With a typical payday loan, you set up a loan agreement with the lender for the amount of money you want to borrow; states often limit the amount to no more than $500. Once you get paid, the lender needs to be reimbursed the amount you borrowed, plus a fee. If you can’t pay the loan back in two or four weeks – the most typical loan periods – the fee continues every two- or four-week period until the loan is paid off.
Payday loan fees can be steep; if someone takes out a $100 loan with repayment in two weeks, a fee of $15 could equal an APR of about 400%. The maximum credit card APR , for example, is generally about 30%.
Also, since your employer is not involved in the transaction, it can’t limit how many times you borrow against your future earnings, as may be the case in an employer-led program.
It’s possible that, in the future, many companies will allow employees to get their pay more quickly on a regular basis, maybe even every day.
The traditional two paychecks per month model “has been in place for decades now” largely because of the administrative burden for companies to process, print and distribute paper checks, Sarvady says. As a result, people earn most of the paycheck before they receive it.
“The question comes up: ‘If I already earned the money, why do I have to wait for it?'” Sarvady says.
Some companies are already working with employers on business models that allow for daily access to earned wages at a cost per transaction for employees, or at a pace that’s driven by employees who choose one of a variety of time options at no cost to them.
A daily-pay scenario can “go through a normal payroll process,” says Caton Hanson, co-founder and chief legal officer of Nav, which helps business owners manage credit. “It’s not necessarily an advance. You earned these wages today. Here you go.”

What First-Time Homebuyers Should Know About Closing Costs

Closing costs are easy to overlook when you’re buying your first home, as you’re probably most concerned about the house purchase price, your down payment and the mortgage interest rate. But it’s a mistake to forget about closing costs, a sometimes-mysterious mix of fees, charges and advance payments that, if not handled well, can make closing day a scramble.
Here are some tips on how to plan ahead for closing costs.
Closing costs are fees and expenses that allow you to finalize a home purchase, including mortgage-related fees, property title insurance and taxes.
Within three days after you file a mortgage application, you will receive an estimate of closing costs, says Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America.
“On that loan estimate, it should detail exactly the purchase price of the home, amount of the mortgage, interest rate” as well as the estimated closing costs, Haynie says.
The closing costs will be listed on the form as an exact amount or estimated range. Here is a sample of the form.
As you stay in communication with your lender leading up to the closing, you’ll find out if any of the anticipated costs change. Then, a few days before the closing date, you’ll get a closing disclosure that will confirm the fees you will pay. All of the payments on that form will be due at closing, so it’s vitally important that you prepare to cover the closing costs, which will likely come out of your down payment.
Your closing costs will vary based on several factors, such as the size of the home, the down payment amount, type of loan you choose and what you’re able to negotiate with the seller.
Generally, closing costs run between 2% and 5% of the price of your home, which could be up to $10,000 for a $200,000 home. The average for a single-family property in 2018 was $5,779 including taxes and $3,344 without taxes, according to a 2019 survey by ClosingCorp , a real estate data firm. Costs can also vary by state. According to the survey, the highest-cost states were New York ($13,581) and Delaware ($13,309), while the lowest were Missouri ($1,887) and Indiana ($2,002).
Here is a look at some of the most common closing-related costs. Some are paid days or weeks before the closing date, but many are settled on the day of closing.
Earnest money. While it’s not technically a closing cost, buyers need to provide what’s known as earnest money after they sign the home purchase contract. The money is a show of good faith toward the seller and could be as much as 1% to 5% of the purchase price. The money can be used toward closing costs or your down payment.
Appraisal. The appraisal is required to make sure the home sale price is justified. “That is pretty much a flat fee that can range around $450 to $550 depending on the size of the transaction,” says Tom Parrish, vice president, head of retail lending product management at BMO Harris Bank. “It can be more if it’s a larger home.” The fee is usually paid when the appraisal is performed but is sometimes paid at closing.
Home inspection. Buyers will want to be sure a home has no major structural defects before purchase. The cost could be up to $500 or higher, often depending on the size of the house. Pest and radon inspections may be needed, too. Like with the appraisal, you’ll usually pay this fee when the home is inspected, but it’s sometimes paid when you close.
Points. If you choose to – or have to – pay points as part of your loan, they are charged as 1% of the loan. Paying a point at closing can help you get a lower interest rate, or you can choose to get the points money given back to you and use it toward closing costs.
Credit report fees. The lender will want to check the credit of the person – or people – buying the home, which could cost around $25.
Flood determination. A lender has to determine if a property is in a flood zone, and the fee is nominal – likely under $10, Parrish says.
Tax monitoring services. This ensures property taxes have been paid throughout the life of the home and could cost $50 to $75.
Title-related costs. The lender will conduct a title search and also take out title insurance to make sure there are no complications. The homebuyer is encouraged to take out insurance as well. A title search fee varies based on location and vendor but is usually around $200. Title insurance about 0.5% of the home’s value.
Government taxes and fees. Counties can charge a recording fee, and states, counties and even municipalities can add transfer taxes, which could increase your total costs. Although sellers often pay these, there might be a chance you’ll have to chip in.
Homeowners association fees. A homeowners association for a townhouse or condominium development might tack on a transfer fee that could be paid by a seller, buyer or both.
Document and processing fees. These fees are often called origination fees and can include loan application processing, underwriting and other services. Costs can vary by financial institution.
Attorney fees. A buyer may want to have representation throughout the process, as well as at closing. Fees could be a few hundred to several hundred dollars.
Home insurance. Whether you’re putting your home insurance payment in escrow or not, lenders usually require the buyer to pay for the first year at closing.
Mortgage insurance: If needed, you could pay the first year’s mortgage insurance all at once at closing or have it paid out in escrow.
Property taxes. You’ll likely have to pay off taxes for the rest of the year or at least the next six months. This could cost thousands of dollars if you close in June or July and taxes are due in December, Parrish says.
The closing cost estimate you receive right after you apply for your mortgage should be very similar to what you end up paying at closing. But you could run into a few surprises along the way.
“It’s a very dynamic process, and there are a lot of moving parts” between the application and closing, such as the appraisal and home inspection, Haynie says.
Haynie cites a few examples:
Lenders are allowed to change closing costs if there is a change in circumstances, such as sales price. Some fees, such as ones for the lender and transfer taxes, cannot increase.
Negotiation and comparison shopping can help reduce – or even eliminate – some closing costs for first-time homebuyers.
Negotiation. Negotiating with the seller is “one way to minimize the impact of closing costs on first-time buyers,” Haynie says.
If buyers know they’re going to have trouble picking up the closing costs along with an adequate down payment, it’s worth it to try to negotiate a deal with the seller.
“But there’s no free lunch,” Haynie says. “The property seller is not going to agree to a really low sales price far below asking price” and then pay all the closing costs.
Comparison shopping. As you research the best offers from banks, credit unions and mortgage lenders for your loan, make sure to find out if you can get a deal on closing costs.
For example, you might get a discount if you work with a mortgage broker connected to your real estate agent. Or a bank or credit union might be offering a deal on closing costs. It’s a good idea to focus on the document- and processing-related fees from lenders and see if all of them are justified. Also, you could try to shop around for the best deal on your title insurance – just make sure you allow enough time to find the right one.
When first-time homebuyers budget for a down payment, they need to account for closing costs as well as how much money they’ll need to keep up the property.
“You don’t want to walk into a house and have zero in your savings account” because everything was spent in buying the house, Parrish says.
A 20% down payment is often considered ideal for a home purchase because it eliminates the need for mortgage insurance payments. But it’s difficult for many first-time homebuyers to come up with that much money for the down payment, plus handle all the closing costs, Haynie says. In that case, he says it’s OK to have less than 20% down and pay some mortgage insurance for a while.
It’s ideal for homeowners to reserve two to three months’ worth of their regular monthly payments when they move into a home, Haynie says. Parrish recommends saving 1% of the value of the home each year to pay for upkeep.
“You have ongoing maintenance and costs that a lot of folks don’t realize,” Parrish says.
There are many programs throughout the country offered by government agencies and nonprofits that are designed to help first-time homebuyers, especially those with low and moderate incomes.
Financial institutions are often aware of these programs and will incorporate them into their discussions with you when you line up your financing. Lenders will try to understand homebuyers’ budgets, what they can afford and whether they qualify for assistance programs, Parrish says.
Assistance could come in different forms:
If you give yourself enough time – about six months ahead or more, Haynie says – you can find the resources you need and make sure your credit is strong enough to make it work. Meet with a lender and also with a housing counselor at a local nonprofit that is designed to help prospective homebuyers.
“You have to take everything into consideration before you go shopping,” Parrish says.
After all of your planning, you might still come up short. That’s when you might need to get help from a parent or relative to cover the shortfall, which you can disclose in a gift letter. A 2019 report from the National Association of Realtors found that 28% of homebuyers 28 and younger had help with their down payment from a friend or relative, as well as 21% of buyers between 29 and 38.
“These are things you need to have lined up and have a strategy on how you’re going to do this,” Haynie says. “It’s not something where you can wake up Saturday morning and say you want to buy a house.”

Should You Consider a Holiday Loan?

Holiday loans are personal loans that you can use to finance year-end holiday expenses, such as gifts, decorations and parties. Expenses around the holidays add up to about $1,000, according to the National Retail Federation’s Holiday 2018 Consumer Trends report. That could be difficult for some consumers to manage without financing.
But while it’s understandable to want the best holiday experience for your family and friends, holiday loans can cause more harm than good.
Holiday loans, sometimes also called Christmas loans, aren’t a specific type of personal loan. Often, personal loan companies allow you to use your loan funds for any personal expense, including holiday-related expenses. As the end of the year approaches, lenders may use the term “holiday loan” to market personal loans for that purpose.
While the holidays represent a short-term need, personal loans typically aren’t short-term loans. Among top lenders, you can have between two and seven years to pay back what you owe, although some may offer shorter terms. So while you’ll have a monthly payment for a while, you won’t have to scramble to pay back the loan in full within the next few weeks as you would with a payday loan .
Also, personal loans tend to charge lower interest rates on average than credit cards and short-term loans. According to data from the Federal Reserve for the second quarter of 2019, the average rate for a two-year personal loan is 10.63%, compared with an average rate of 17.14% for credit cards. Payday loans can have annual percentage rates upward of 400%.
The desire to get a personal loan for the holidays is understandable. The act of gift-giving is commendable – and often expected during this time of year. But going into debt to make it happen could end up hurting your loved ones in the long run.
If you qualify, a personal loan can give you an influx of cash that you can use to cover a variety of holiday-related costs. But after the excitement of the season ends, you may regret it. Here’s why.
Averages don’t tell the whole story. While the average interest rate on a two-year personal loan is relatively low, that’s just an average. Like other loan types, personal loans typically have a risk-based pricing model. This means that your interest rate can be higher or lower based on your creditworthiness.
If your credit isn’t in excellent shape, you may end up with an APR of more than 20% or even 30%. And if you have bad credit, some personal loans have interest rates in the triple digits.
“The better your credit, the lower your rate is going to be,” says Katie Ross, manager of education and development and housing for American Consumer Credit Counseling. “But the longer the loan term, the more interest you’re going to (pay) overall.”
Also, the average rate may not include fees associated with the loan. Some personal lenders, for instance, charge an origination fee, which can be as high as 8% of the loan amount. That charge may be deducted from the loan amount before you receive it, but you’ll still need to pay back the full loan amount.
It could break your budget. If you’re looking at holiday finance options because you’re living paycheck to paycheck and haven’t been able to set money aside, adding another obligation to the mix could exacerbate the problem.
For example, let’s say you take out a $1,000 personal loan with a 20% interest rate, 5% origination fee and a two-year repayment period. You’ll receive just $950 from the lender, and your monthly payment will be $51. Even if that does fit within your budget, you’ll end up paying $222 in interest over the life of the loan, which is a good chunk of cash you might want to use elsewhere.
“If you’re already in a spot where things are tight, and you borrow money, now you add a payment on top of it,” says Brandon Renfro, a certified financial planner and assistant professor of finance at East Texas Baptist University. “By the time you roll around to the next holiday, you’re probably still feeling the effects from the previous one.”
In some cases, lenders may prevent you from taking on debt you can’t afford by calculating your debt-to-income ratio. That’s the percentage of your monthly gross income that goes toward debt payments. If yours exceeds the maximum allowed by the lender – which can be as high as 50% or more – your application may be denied outright.
But if your budgeting woes are due to other reasons, such as medical bills or everyday expenses, those may not be completely represented in the DTI calculation, and you could still get approved for a loan you can’t afford.
It can damage your creditworthiness. If you get a holiday loan and don’t have the cash flow to pay it back, missing a payment could significantly damage your credit for years to come. Your payment history is the most important factor in your FICO credit score , and a late payment will remain on your credit report for seven years.
Even if you make on-time payments, that extra obligation will be included in your debt-to-income ratio the next time you apply for a loan. And if you actually need the money to buy a car or home or to cover emergency expenses, getting denied because of a high DTI can be devastating.
Also, most personal lenders run a hard credit check when you apply. This inquiry will remain on your credit report for two years and can knock a few points off your credit score temporarily. While this may not have a big impact on your creditworthiness on its own, the effect of one inquiry could be compounded if you’ve applied for credit multiple times in a short period.
Saving in advance for the holidays is the best course of action. But if it’s already crunch time, here are some other options to consider.
Set a reasonable budget. It’s easy to get caught up in the season of generosity, but if money is tight, it’s best to create a budget to avoid overextending yourself. Take some time on this step to make sure you don’t forget about important expenses that can ruin your budget later.
“If you spend $100 on gifts per person, maybe cut that in half or even further than that,” says Ross.
Consider how much money you actually have to work with and try to stay within that. If you can’t, look at some of the other options listed below.
Find more money in your budget. Take a look at your overall household budget and find out if there are any areas where you can reasonably cut back. Look for discretionary spending areas like entertainment, eating out and clothing instead of necessary expenses like rent, utilities and debt. Consider getting a seasonal job that can give you access to a little more income to help bridge the gap.
Note: Some lenders may offer to allow you to skip a payment during the holidays to give you some more room in your budget. In general, though, you’ll need to pay a small fee to take the offer, and it will extend your loan repayment period another month – which means more interest. Unless you’re desperate and the upfront fee is minimal, it’s best to avoid these promotions.
Consider a 0% APR credit card. If your credit is in good shape, you may be able to qualify for a credit card with a 0% APR promotion . These cards usually offer 12 to 18 months with no interest on purchases.
Some 0% APR cards even offer a sign-up bonus and rewards on top of their interest-free promotion. These cards can allow you to make holiday purchases and pay them off over time without interest charges.
But if you’re going to go this route, remember that even if you’re not paying interest, it’s still debt. And if you don’t pay off the balance before the promotional period ends, it could become expensive debt.
Finally, keep in mind that if you miss a payment on the card because of a tight budget, you could lose the 0% APR promotion and get slapped with the higher rate immediately.
“It all comes down to being able to pay your bills on time and having a plan,” says Ross. “Because if you’re already struggling, it doesn’t matter that it’s 0% or not.”
Ask family members or friends for help. Asking someone close to you for a loan can be uncomfortable and can easily damage your relationship. But if you must, it may be better than taking on a personal loan or even more expensive holiday finance options. You’re much more likely to be able to get a no- or low-interest loan and favorable repayment terms from a family member or friend than you are from a lender. Just be sure to draw up a simple contract and follow the agreed-upon terms.
While your focus may be on the upcoming holidays, start looking ahead. Depending on how much money you typically spend during the holidays, plan to set aside a certain amount each week or month specifically for holiday expenses.
For example, if you usually spend $1,000, that comes to just less than $20 per week or a bit more than $83 per month. Breaking it down can make saving for future holiday seasons more manageable and less stressful.
“Don’t just put it in your checking account,” says Renfro, “because you’ll inevitably think of a reason to spend it.” Instead, set up a separate savings account for holiday savings, and create an automatic weekly deposit or transfer to the account. Physically separating the funds like this can also help you separate them mentally, so you’re not tempted to spend that money on other things.

Can You Get a Small Business Loan With No Credit Check?

Small business loans can help your business grow, but qualifying for one isn’t always easy. If you have poor credit, you might consider getting a no-credit-check business loan. But there are a few important things to know about what loan options are available and how they work.
When you think of a business loan, you might think of a traditional loan that you get through a bank. With these types of loans, lenders evaluate you and your business closely for the five C’s of credit : capacity, capital, character, collateral and conditions. These five factors give lenders a solid understanding of how responsibly you use credit on behalf of your business.
Business loans that don’t require a credit check work a little differently. With these financing options, lenders focus on other aspects of your business, aside from credit scores, to determine how likely you are to repay what you borrow. That puts most no-credit-check business loans in the alternative financing category.
“Alternative business lenders have easier applications, more lenient credit requirements and potentially faster access to funds than traditional bank loans,” says Farhan Ahmad, co-founder and CEO of financial operating platform Bento for Business.
This chart highlights some of the things lenders take into account with no-credit-check loan options:
Note that this is not an exhaustive list of requirements. Individual lenders may have other conditions you need to meet to qualify for a loan.
There’s no specific credit score you can rely on for approval with all business loans, as it will vary depending on lenders and loan types.
A loan backed by the Small Business Administration usually requires a FICO credit score of 680 or higher, but other loan options could have higher or lower requirements. “Alternative lenders will work with lower credit scores, however, they will charge higher rates to mitigate the risk,” says Brian Cairns, founder of small business consulting company ProStrategix Consulting.
Lenders typically consider both your personal and business credit scores when making lending decisions. Personal credit scores are based on your personal credit history and habits. That includes the total amount of debt owed versus your total credit limit, payment history and how often you apply for new credit.
Business credit scores , on the other hand, tend to focus primarily on payment history. The size of your company, your relationships with your vendors and your business’s industry can also influence your scores. These scores can have a different range from FICO scores, which go from 300 to 850. The Dun & Bradstreet business credit score, for instance, ranges from 1 to 100. A higher or lower score indicates how likely you are to repay a business loan.
Many business financing options are designed for established businesses that have a minimum amount of operating history. If you have a new business, getting financing may be a little more challenging, but it’s not impossible.
You can get startup business loans with bad credit, but your loan options might be limited to online lenders specializing in bad credit borrowers. And they may require at least a few months in business to qualify.
The downside of these types of loans is that they’ll likely cost you more money. If you have bad credit or no credit and your business hasn’t yet proved itself profitable, your loan is much more risky than one extended to an established business with good credit. Your lender can offset that risk by charging you more fees or a higher interest rate for the loan.
Crowdfunding is another option for getting business loans without a credit check. Some platforms allow people to invest in businesses around the world as a way to do good. There are others that allow businesses to offer their backers perks other than money as a thank you for funding their campaign. For example, if you run a startup that needs capital to manufacture an innovative type of reusable water bottle, you could give your backers some sample product once you have some produced.
The upside of these types of crowdfunding platforms is that bad credit may not matter for getting a loan. Instead, your ability to get financing is based on the merits of your campaign. There are two drawbacks to keep in mind, however. First, if your campaign isn’t successful and you don’t raise the full amount of money you’re seeking, you might not get any of the funds. And second, certain platforms may charge you a fee to launch a campaign.
The chief benefit of getting a no-credit-check loan for your business is being able to access funding even if your credit might prevent you from getting a traditional business loan. And getting access to funding could give you the opportunity to build credit for your business. By making payments on time and reducing your loan balance, you can create a stronger business credit profile, which could make borrowing in the future easier.
The chief downside of no-credit-check loans is potentially higher interest rates. The higher your rate, the more the loan costs over time. But the cost of financing might be worth it if it means increasing your revenue.
Something else to keep in mind is how much you can realistically borrow when you have poor credit. If you aren’t able to get the full amount of money you need, that could make it more difficult to pursue your borrowing objectives.
Do you need good credit to get a business loan? Not necessarily. There are loans you can get with no credit check at all. You just might pay more in interest and fees.
Aside from business loans, there are other ways to fund your business. Those include:
Each one has its pros and cons. A personal loan, line of credit or credit card may be easier to qualify for, for instance. But commingling personal and business finances can be problematic. If you default on the debt, your personal credit scores would take a hit and you would be personally responsible for repaying the debt.
Equity financing and borrowing from friends and family can also have its ups and downs. With equity financing, you ask investors to back your business, and in exchange they receive an ownership stake in it. You don’t have to repay any money to those investors, but you’re trading off full control of your business. And borrowing from friends and family can get tricky if you aren’t able to pay the money back.
If you’re seeking a no-credit-check business loan, it’s likely you have bad credit or no credit. If you improve your credit rating, you can increase the number of business loan options available to you.
You can improve your personal credit scores by:
With business credit scores, the best ways to improve are paying your bills on time and maintaining good relationships with your vendors and suppliers.
Try to fix your scores first, Cairns says. If that’s not possible, then take the minimum amount required from some alternative lender while fixing your score. “That way,” he says, “you can refinance or get an additional loan at a better rate later.”

Your Guide to Plastic Surgery Financing

A nip and tuck, from a face-lift to a bit of Botox or a little liposuction, could leave you looking better than ever – for a price, of course. If you’re thinking of having plastic surgery, brace for a dent in your bank account.
Insurance rarely covers the cost of elective cosmetic surgery but may pay for reconstructive plastic surgery. The difference is that reconstructive surgery corrects facial and body abnormalities caused by birth defects, injuries or diseases.
Most cosmetic surgeries cost thousands of dollars. Common procedures such as breast augmentations and tummy tucks can range from about $3,000 to more than $7,000, according to a 2019 report from the American Society of Plastic Surgeons.
If you don’t have the cash upfront, you can look into options for plastic surgery financing. Know the pros and cons of each one to make the best choice for your budget.
Plastic surgery financing affords consumers the ability to have procedures and pay over time. Options include personal loans, credit cards and provider payment plans. No matter what you pick, make sure you understand the terms and whether your choice makes the most financial sense.
Here’s more about plastic surgery financing.
Personal loans. Qualifying borrowers can take out loans with banks, credit unions or online lenders for plastic surgery. But beware of interest rates, fees and other terms that can vary significantly by loan.
Interest rates for personal loans depend on your credit. If you have good credit , you can qualify for a low interest rate, but bad credit could leave you paying the staggering rate of 36%.
Choose the shortest amount of time to repay the loan that you can manage at the lowest interest rate you can get.
Plastic surgery loans should only be taken out for the short term, says Kimberly Foss, president and founder of Empyrion Wealth Management in Roseville, California. “That means the payoff time is not longer than a year,” she says. “If you have to extend it much further, it’s a sign you can’t afford it.”
Medical credit cards. You may be able to get a medical credit card through your health care provider. Cards can cover your medical costs, from plastic surgeries such as face-lifts to injectable treatments such as Botox.
The CareCredit card, for instance, lets you make payments over six, 12, 18 or 24 months with no interest. The catch is that you must pay the minimum due and pay off the bill within the agreed-upon time frame. If you don’t, interest will be assessed at a rate of 26.99% from the purchase date.
“These can be great options, but only when you stick to the terms,” says Kelley Long, a Chicago-based financial coach. “Make sure the payments won’t compromise your other goals, too.”
Medical credit cards may benefit both providers and patients, says Dr. Sheena Kong, a San Francisco-based cosmetic procedure specialist.
“For patients, it lessens the financial blow,” Kong says. “Getting a financial arrangement to pay over time without any interest being added is ideal. It’s a win-win situation for the clients and the doctor’s office.”
Credit cards. You could pay using a regular credit card, which usually offers an interest-free grace period of at least 21 days. But if you carry a balance on your credit card, you lose your grace period.
Or you could opt for minimum payments on your credit card, but the final cost would be ugly. You would spend 18.5 years and more than $10,600 on financing fees to pay off a $10,000 cosmetic procedure if you only make minimum payments.
A healthier plan: Treat the credit card as a short-term loan. If you used the same card for the $10,000 procedure and paid off the balance over six months instead, the fees would be about $561.
Another way to use plastic for plastic surgery is to apply for a new credit card, ideally one with a 0% introductory APR and a sign-up bonus. You can use the 0% APR to pay off your balance with no interest, usually over 12 to 18 months.
And the value of a sign-up bonus could offset the cost of your procedure by at least $100. Because the cost of cosmetic procedures often surpasses the card issuer’s spending requirement for a sign-up bonus, earning that reward should be easy.
You’ll need good to excellent credit for cards with a sign-up bonus and a 0% introductory APR. If you can get this type of credit card, it can be a savvy way to finance your procedure.
Just be sure to pay off your balance within the card’s introductory period. A $10,000 procedure spread over one year will require monthly payments of $833.33. Pay at least that amount, and you can avoid interest on your purchase.
Still, this technique has risks. “An important expense may come up that you don’t have the money for, and if you’re already in debt for this, you may end up regretting it,” Long says.
Provider payment plans. If you want to sidestep loans and credit cards, you may be able to work out an arrangement with the provider. Dr. Lesley Rabach, a facial plastic surgeon in New York City, says she helps patients cover large costs this way.
“A face-lift can easily be $25,000, and many people don’t have the money to pay for it all at once, so they ask for a payment plan,” Rabach says.
She and other surgeons work with patients as they pay beforehand for procedures. Both the doctor and the patient can benefit from this kind of arrangement.
Interest doesn’t apply, and you don’t need good credit. It also establishes a relationship between you and your doctor.
“Payment plans are really good for communication,” Rabach says. “Stress is minimized because you’re spending time getting to know each other, and some doctors will even offer a small discount.”
Other plastic surgery financing options. You can find other ways to finance plastic surgery, but they’re generally not a good idea.
Retirement plan loans can offer access to your funds but derail your savings. And if you leave your job, you will have to pay back the loan or report it as income and pay taxes, plus a possible 10% early withdrawal penalty.
Home equity loans or lines of credit allow you to tap your home equity to pay for surgery and may have low interest rates. But because your home guarantees the loan, this can be a risky move.
You could also ask family members or friends for a loan, and they might offer favorable terms. But the risk to personal relationships may be too great for an expense that might not be necessary.
Plastic surgery financing allows you to pay for your procedure over time, which is helpful, given the typical cost. Keep in mind, though, that this can be a big financial decision that shouldn’t be rushed.
Do not decide on financing while you’re in the doctor’s office. You’ll want to bring a neutral third-party into the fold to assess whether you can handle the financial commitment.
“Consult a financial advisor,” Long says. “It should be a person who has no vested interest in the outcome. It can save you from mountains of debt.”
And if you still want to move forward, do a test run.
“Figure out how much the payments will be, then set them aside for a few months,” Long says. “If they’re easy to meet, it will give you confidence that you can afford it without it stressing out your budget.”
Another advantage of a test run: You’ll have saved some cash that you can use for the forthcoming payments.

How Piggyback Loans Work

If you’re making a small down payment on your home, a piggyback loan might help you avoid some extra costs on your mortgage. However, these types of loans aren’t without their own costs and drawbacks. Here’s what you need to know.
A piggyback loan is a second mortgage – usually a home equity loan or home equity line of credit, also called a HELOC – that you take out alongside a mortgage.
Homebuyers use piggyback loans to avoid paying private mortgage insurance, which typically kicks in if your down payment is below 20% of the home’s selling price. PMI acts as an insurance policy to protect the lender if you fall behind on payments or default altogether.
A piggyback mortgage arrangement typically offers a primary mortgage for 80% of the home’s value, plus a home equity product to make up the difference between your down payment and the remaining 20%. A common piggyback loan is an 80-10-10, which includes a first mortgage for 80% of the home’s value and a home equity loan or HELOC for 10%. You’d be responsible for the 10% down payment.
There are other combinations, such as 80-15-5 or 80-5-15, where the portions covered by the piggyback loan and your down payment vary.
The piggyback loan typically comes with a higher interest rate than the first mortgage, and the rate can be variable, which means it can increase over time.
Piggyback loans became popular during the housing boom in the early to mid-2000s. In 2006, for instance, roughly 30% of homebuyers in New York City used one, according to a 2007 report from the NYU Furman Center.
The loan combination made it possible for aspiring homeowners to buy the homes they wanted and avoid PMI without putting down 20% or more in cash. But it also left their homes more vulnerable to default.
When the national housing bubble burst in the late 2000s, homeowners with less equity in their homes were more likely to default than others who had significant equity.
Piggyback loans still exist but are rare. “There was a decrease in popularity but also a substantial tightening up of the guidelines by the lenders that offer those piggyback second mortgages,” says Jeff Brown, a branch leader and mortgage originator for Axia Home Loans.
It could save you money. PMI can cost anywhere between 0.3% and 1.5% of your loan amount annually. So if your mortgage is for $250,000, you could be on the hook for $750 to $3,750 in PMI premiums each year. That translates to a monthly payment of $62.50 to $312.50 on top of your principal and interest payment to your lender and property taxes.
Depending on how much the second mortgage costs in monthly payments, you could end up paying less than you would with PMI. But it easily could go either way. A $25,000 loan with a 30-year term at 7% will have a monthly payment of $166.
That might be lower than a $312.50 monthly payment for PMI, but remember that PMI generally can be removed when your equity reaches 20%. A piggyback loan remains even after you reach 20% equity, so you could still be making monthly payments on a piggyback home equity loan long after you would have been off the hook for PMI.
You’ll need to do some math to find out which option is better. This means you’ll need to work with your lender to find out how much the PMI would cost and what monthly payment to expect if you apply for a second mortgage.
You may only get quotes on each, which are typically contingent on a few factors considered during the application process, but an estimate may be enough to give you a good idea of the difference.
If your credit is less than stellar, the interest rate on a second mortgage could be high enough to make it more expensive. But if your credit is in great shape, the math could work in your favor.
You can deduct interest from both loans. The IRS allows you to deduct interest paid on up to $750,000 in qualified mortgage debt. That includes home equity loans and HELOCs used to buy, build or substantially improve the home used as collateral.
Adding these savings into your calculation of whether a piggyback loan can save you money can make things more complicated. Also, it can be tough to know exactly how much you could save – or even if it makes sense to itemize your deductions and claim the mortgage interest deduction at all – unless you speak with a tax professional.
You can keep a HELOC for other purposes. A home equity loan is an installment loan, which means you get the full loan amount as a lump sum and pay it back in equal installments. With a HELOC, however, you’ll get a revolving form of credit during the draw period, which you can pay back and borrow again over time.
“If you take a HELOC as your piggyback and you plan on paying it down but want to have it available to draw on going forward, that may make more sense than getting a first mortgage with PMI because you don’t have that added feature,” says Matt Hackett, operations manager at Equity Now, a direct mortgage lender.
If you’re thinking about taking out a loan in the coming years for home improvements or for other reasons, using a HELOC now that you can use again and again without needing to apply for a new loan – and pay closing costs all over again – could be an extra benefit. Just keep in mind the draw period is typically around 10 years, followed by a repayment period of 15 to 20 years.
Closing costs could reduce value. In addition to paying closing costs on your first mortgage, you may need to pay closing costs on your home equity loan or HELOC. However, some lenders offer home equity products with low or no closing costs. You’ll want to find out what the lender charges, so you can include it in your calculations.
Even if closing costs are low, the math may still not work out in your favor, and paying PMI could end up being cheaper than taking on a second home loan.
It could make refinancing tough. If you get your piggyback loan from a different lender than the one that provides your first mortgage, which is typical, refinancing your home to get cash out or score a lower interest rate could be more difficult later.
This is because both lenders would need to agree to the refinance unless you’re taking out a big enough refinance loan to pay off the second mortgage. Convincing both lenders can be tough, especially if the value of your home has declined since you bought it.
The cost could go up over time. If the second loan you’re taking out is a HELOC with a variable interest rate, don’t base your calculations solely on the current cost of each option.
A variable interest rate can fluctuate with the market index interest rate. There’s no way to know exactly how much more a variable interest rate can cost you because it’s impossible to predict the movements of market interest rates. If you’re on a tight budget and can’t handle having your mortgage payment increase over time, a variable-rate piggyback loan may not be a good choice.
Look for loans with no PMI. Some lenders offer conventional loans with no PMI even if you don’t have a 20% down payment. Depending on the lender, this can be restricted to a first-time homebuyer or low-income program, or you may need to agree to a slightly higher interest rate.
As with a piggyback loan, run the numbers to make sure you’re not paying more in the long term with a higher rate than you would with PMI.
Pay down your balance quickly. Conventional mortgage lenders will usually add PMI to your loan if your loan-to-value ratio is higher than 80%, but eventually, your loan balance should fall under that threshold. Lenders are required by law to automatically remove the PMI once your LTV reaches 78% based on the original loan and home value.
If you’re expecting a significant windfall or have the cash flow required to make extra payments, it could help reduce your loan balance more quickly and get you to the point where you no longer need the insurance.
As you’re working on paying down your balance, if you think your home’s value has increased and you’re at or below 80%, you can get an appraisal done on the house. If you’re right, you can request that the lender remove the PMI manually.
Wait until you’ve saved enough. While there are ways to buy a home now and avoid PMI, you might be better off waiting until you have enough cash on hand for a 20% down payment.
Saving the 20% you need to avoid PMI can take years. But if you think you can save enough cash quickly, it may be worth it to wait.

What to Do When Student Loan Grace Period Ends

Students who rely on loans to pay for college may give little thought to the financial burden they’ve taken on until after graduation. But borrowers will quickly need to devise a plan for how to pay back student loans as their grace period comes to a close and repayment begins.
“They’re thinking about graduating and looking for a job, and have kind of put off the idea of what they’re going to owe until they leave,” says Chris George, dean of admissions and financial aid at St. Olaf College in Minnesota.
Most students with federal loans will have about six months after graduation before repayment must begin. If a student graduated in the spring, his or her repayment would begin in the fall.
Here are steps that experts advise student loan borrowers take to get started:
Some student loans provide a grace period after students graduate, leave college or drop below half-time enrollment before they must begin repayment. The length of time of the grace period for most federal student loans is six months.
This period allows graduates time to obtain employment and make a plan for repayment.
But not all student loans provide a grace period. PLUS loans do not offer students a grace period; repayment must begin when the loan is fully disbursed.
Loans that do provide a six-month grace period include direct subsidized loans, direct unsubsidized loans and all Stafford loans, according to the Department of Education.
Borrowers who consolidate their loans forfeit their remaining grace period, and students who go back to school before the end of their grace period and enroll at least half-time will receive their six-month grace period when they stop attending or drop below half-time status. Borrowers who are called to active duty in the military for more than 30 days before the end of their grace period receive the full six-month grace period when they return from duty.
“Some private lenders offer grace periods as well,” Abril Hunt, a training and outreach manager at ECMC Group, a student loan guarantor and financial literacy nonprofit, wrote in an email. “The length of the grace period will vary by lender and loan product, but it’s usually about six months. Be sure to check your loan agreement to see what (if any) grace period you have.”
If they are able, borrowers can make payments on their student loans while still in the grace period. Experts advise doing so, given that interest will accrue during the grace period for most federal student loans.
If a borrower’s loans have been building, a crucial first step is to know how much is owed. On the National Student Loan Data System , the Department of Education’s database, students can locate all their federal loans and find debt totals, including accumulated interest.
“Before I looked online, I wasn’t even sure how much my loans were, including interest,” says Meghan Mitnick, a teacher in New York City who had six-figure loan debt from two New York University degrees. “Even though it’s really scary, know exactly what you’re dealing with.”
Once borrowers have a good grasp of just how much is owed, they should then find out exactly who must be paid by contacting the correct student loan servicer .
“That’s the question we get often: Who am I supposed to be paying?” George says.
Whether a student took out federal or private loans, the loan servicer is the first point of contact for any questions and address updates, so don’t hesitate to reach out, recommends Erin Wolfe, associate director of financial aid at Bucknell University in Pennsylvania.
“The best advice for any graduate is to remain proactive in loan repayment,” Wolfe wrote in an email. “If you have questions or concerns, contact the loan servicer without delay. Building a successful repayment strategy for student loan debt is essential for shaping the borrower’s financial future.”
The standard repayment plan for federal student loans is 10 years, but that doesn’t necessarily make it the right option for every student.
For example, some borrowers of federal student loans may be better off opting into income-based repayment or income-contingent repayment plans, which adjust monthly bills according to pay.
Hunt says the most important thing to remember about repayment plans is that they can be changed.
“Borrowers are not stuck in the same repayment plan forever,” Hunt wrote. “If they choose the wrong plan for their situation or have a sudden lifestyle change, they should contact their servicer to discuss options for delayed payment or how to change their repayment plan.”
Once borrowers determine a monthly obligation, they should keep track of other spending and bills. Budgeting websites like Mint.com have helped University of Pittsburgh graduate Shawn Norcross, a sales representative at Trex Co. who is in the process of repaying about $83,000 worth of student loans, he says.
“Budgeting is amazing, because whenever you can actually see it on a website or on your phone, you don’t want to go over; you don’t want to cheat,” says Norcross, who compares financial tracking to counting calories. “It almost turns into a game of sorts where you want to win.”
As students budget, they may find themselves forgoing activities or events to pay off their debt. For Norcross, his payments have taken precedence over major decisions as he plans to avoid default , he says.
“My student loans are affecting my life,” Norcross says. He says he wanted to move to Washington, D.C., after college, but couldn’t because of his financial situation. “My student loan payments are probably No. 1.” 
Prioritizing may also mean minimizing other forms of debt or, if possible, chipping away at student loans before tackling other types of debt.
“Student loans are one of the few debt obligations that are rarely forgiven in bankruptcy filings,” notes Michael Scott, associate provost for enrollment management at Texas Christian University . “In a worst-case scenario, you will be better off if you’ve reduced non-dischargeable debt first.”
Borrowers who are scrimping or sacrificing to make their monthly student loan payments may find it helpful to remind themselves what they’re paying for.
“I really value the education I got, and I got a good job, so it paid off,” Mitnick says.
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.

Is a 15- or 30-Year Mortgage Right for You?

Mortgages come with many options, and one of them is your loan term: a 15-year versus 30-year mortgage. A 30-year mortgage can make your payments more affordable, but a 15-year mortgage is generally cheaper overall. As you’re weighing your mortgage options, here are the most important things to know about 15- and 30-year mortgages.
A mortgage is a type of term loan, meaning the amount you borrow is repaid over a set period of time. You make principal and interest payments according to an amortization schedule that’s set by the lender. Your monthly payment schedule may also include homeowners insurance and property taxes if those are escrowed into your payment. Private mortgage insurance is also added when applicable, usually when you buy a home with less than 20% down.
When you have a 15-year mortgage, the total amount you have to repay is spread out over 15 years, or 180 payments. If you choose a 30-year mortgage instead, you repay the loan over 30 years, or 360 payments.
There are several good reasons to choose a 15-year over a 30-year mortgage.
Pay the home off more quickly.
“The monthly payments will be larger, allowing more money to go to the principal in a shorter amount of time,” says Benjamin Ross, a real estate agent in Texas. Your loan balance disappears faster, which might be important to you if you envision a retirement that doesn’t include mortgage debt.
Lower interest rate.
Because you’re paying your home loan off sooner with a 15-year term, your mortgage becomes less risky for the bank. That may translate to a lower interest rate compared with a 30-year loan. Depending on the overall interest rate environment, rates for a 15-year mortgage may be a half a percentage point or more lower than 30-year mortgage rates.
Less interest total over the loan term.
A lower interest rate also benefits you in another way when adding up the total interest paid on the loan. Here’s a simple side-by-side comparison of the total interest paid on a $300,000 mortgage.
(Note: These calculations don’t include PMI, homeowners insurance or property taxes escrowed into the mortgage.)
In this example, choosing a shorter loan term and qualifying for a lower interest rate results in a total interest savings of $119,621. That’s a substantial amount of money you could keep in your pocket over time.
Build equity faster.
Home equity represents the difference between what your home is worth and what you owe on the mortgage. When your monthly payment is larger because your loan term is shorter, you can build equity at a quicker pace because you’re paying more of the loan principal down each month compared with what you would with a longer mortgage.
What’s great about 15-year mortgages versus 30-year mortgages is also what makes them less attractive for certain homebuyers: a larger monthly payment.
Going back to the previous example of a 15- vs. 30-year loan, the mortgage payment for the 15-year option is $704 higher. A $2,000-plus monthly mortgage payment may not be realistic for every budget.
“A lot of people are more concerned with ensuring that their monthly payment is manageable than the total interest paid over the life of the loan,” says Anthony Sherman, co-founder and CEO of Simplist, a digital mortgage marketplace. “Paying off your mortgage over a longer period of time can free up cash to do other important things, like investing, saving for college or retirement, and paying for renovations.”
Another reason to reconsider a shorter loan term is how long you plan to stay in the home. If you plan to move within the next five years, for example, then being able to build equity faster or get a lower interest rate on the loan may not be as important in your decision-making about which kind of mortgage to get.
A 30-year home loan also has its advantages. Here’s why you might prefer a longer loan instead:
Lower monthly payments.
You don’t need to be a math genius to understand that a longer loan term can make your payments lower. That might be attractive if you want to be able to work on other financial goals while you pay down your home loan. If you’re getting a larger mortgage, being able to pay over 30 years could make the payments more affordable for your budget.
Payment flexibility.
While you’re agreeing to a 30-year mortgage term, you can still choose to make extra payments. That could help you pay the loan off ahead of schedule.
More potential for tax savings.
Interest on home loans is tax-deductible. When you have a 15-year loan, you’re paying off more of the interest upfront, so you may not benefit from the tax deduction as long as you would with a 30-year mortgage instead.
There are some drawbacks to choosing a 30-year home loan over a shorter term.
As the earlier example showed, the biggest drawback is interest. Not only can you end up with a higher interest rate on a 30-year mortgage, but you’ll also pay more total interest on the loan. That assumes, of course, that you stick with the same loan term and don’t refinance to a shorter mortgage at any point.
Refinancing from a 30-year loan to a 15-year loan could save you money if you’re able to get a lower interest rate. Whether refinancing makes sense depends largely on the difference between your current interest rate and the rate you’d qualify for, as well as how much you still owe on the mortgage. Keep in mind that refinancing may involve an upfront expense since you have to pay closing costs . You could roll those into your loan, but that can nudge your monthly payments higher.
Another drawback is that you’ll take longer to build equity with a 30-year loan, since you’re paying a smaller amount toward the interest and principal each month. That could be a disadvantage if you were hoping to take out a home equity loan or line of credit at some point to consolidate debt or finance home improvement projects.
The best way to evaluate whether a 15- or 30-year mortgage is better is to consider your plans and priorities.
Specifically, think about:
Timing is particularly important because of how mortgage payments are structured.
“In the first 10 years of the loan, over two-thirds of your monthly payment is comprised of interest,” Sherman says. “So, if you don’t plan on living in your home for more than 10 years, you’ll end up paying a lot of interest but only paying down very little of the original principal.”
Thinking big picture, in terms of your larger financial goals, can help you decide which loan option is a better fit for your situation.
“If the goal is to build quick equity and pay off the loan sooner, the 15-year plan is a good one,” Ross says. “If one is buying a home long term and has no intent on using equity, perhaps a 30-year loan would be more appropriate, especially if they can’t afford the higher monthly payment.”
When in doubt, run the numbers through a mortgage calculator using 15- and 30-year terms. This can put the short- and long-term financial implications of either loan in perspective.